The United States and European Union have agreed to continue negotiations on tariffs, bolstering the risk appetite across financial markets on Monday.
A look at the deep relationship between the two economies provides insight into just how destructive a trade war between the two entities would be.
Total annual trade between the two was $961.3 billion last year with the U.S. importing $605.8 billion in goods from the EU.
Even a 10% import tax would have a significant impact on the pharmaceutical, medical, auto and aircraft sectors.
But how much revenue would the tariffs generate for the U.S.?
Using Penn-Wharton’s tariff simulator one can estimate the revenue generation linked to a large tariff on all imports to the U.S. from the EU.
A simple 10% tariff including de-minimis items, or those under $800—which appears to be the baseline for all goods regardless of origin imported into the U.S.—would yield a static tariff estimate of $680 billion in revenue between 2026 and 2035.
If a dynamic estimate that involves demand, income and payroll estimates is used, that figure rises to $418 billion, or $41 billion per year over 10 years. Add in the 25% tariff on all steel and aluminum imports and it’s another $23 billion over the 10-year period, bringing the total to $43 billion a year.
But the tariffs, at least for now, don’t end there. The tariff schedule based on so-called reciprocal tariffs are set to increase to 20% on July 9.
Those new trade taxes would result in an increase in tariff revenues to $725 billion over the ensuing decade. If steel and aluminum tariffs are included, that figure would increase to $75 billion a year.
Read more of RSM’s insights on the economy and the middle market.
Neither estimate includes any spillover of trade taxes into the more dynamic service sector should the trade war escalate.
Given 150 years of evidence showing just how destructive trade wars and tariffs can be, these estimates probably are too optimistic on revenue generation once one takes into account the impact on supply, demand and substitution effects, not to mention inflation.
These projections are more than just an academic exercise. American lawmakers are using estimates of tariff revenues as they negotiate a large tax cut, which will most likely far exceed tariff revenues and incur large deficits.
In the end, there is little mystery why investors are pushing up long-dated yields on Treasury securities and pushing down the value of the dollar.
